Understanding the 3-year-high Performance of Manufacturing Index (PMI) for February

In October 2020, Australia’s Performance of Manufacturing Index (PMI) cleared the 50 points mark for the first time after the COVID-induced slump that lasted for six whole months last year. This was a welcome sign that manufacturing centres all over the country were revving up to full speed and the industry was expanding once again.

Fast forward to February 2021, and we can see that the positive outlook has persisted. The Australian Industry (Ai) Group recently announced that the country’s PMI increased by 3.5 points to 58.8 in February 2021, the highest monthly result in 3 years, since March 2018. This has come as a result of major expansions in production, employment, and sales in most of our manufacturing sectors.

Despite additional waves of COVID seizing many parts of the world since October and forcing lockdowns once again, it seems Australia and its manufacturing industry have weathered the storm and adapted to the new normal.

We will now dig deeper into the PMI for February 2021 and understand the factors contributing towards its 3.5 points increase. But before that, let’s recap what the PMI is and what it means.

What is the PMI?

The Performance of Manufacturing Index (PMI) is a composite measure that quantifies the overall growth (or contraction) of the manufacturing industry in Australia. It is measured and regularly published by the Ai Group. An index of 50+ shows that the industry is expanding, and one below 50 shows that it is contracting. The further away the index is from 50, the faster the rate of expansion (or contraction).

The table below shows the activity-level breakdown of the PMI for February 2021. Let’s analyze it in greater detail.

Sales making a tremendous recovery

The index for sales registered the largest increase in February 2021. It jumped by 15.7 points, reaching a high value of 62.2. This shows that demand is finally picking up across all manufacturing sectors at a high rate, and that producers are quickly recovering the ground lost in 2020 due to COVID shutdowns.

Partly because of this rapid increase in sales, manufacturers are experiencing a contraction in the finished stocks of the goods they produce. The index for stocks has fallen by 5.6 points, entering the contraction zone by taking a value of 48.0. Manufacturers with built-up inventories are facing the pull of demand once again, and this will only increase production in the coming months.

New orders ramping up production and employment

Manufacturers are receiving new orders at a greater rate, adding to the demand-pull on production already exerted by the rapidly increasing sales. This is evidenced by the 5.3 points increase in the index for new orders, taking it to 59.9 for February.

Production and employment have responded positively to this pressure, with production rising by 8.9 points to 65.8 and employment climbing 2.7 points to reach 57.8. Along with more hiring, average wages have also gone up with the index growing by 1.8 points to 58.2. Segen has seen these employment numbers climb first-hand. The companies we support have been in search of new talent for the past few months to help them sustain and stabilize this rapid growth in sales and production.

These are clear signs of growth for an important industry that contributes $100 billion to the Australian GDP and employs over 900,000 people from all over the country. With more orders flowing in at a faster pace, production and employment will only rise further in the months to come.

Inputs getting more expensive

Input prices (i.e. costs that go into producing goods) have registered one of the largest expansions, rising by 9.7 points to cross the long-run average of 67.4 and reach 74.1. At the same time, the index for selling prices has remained largely stagnant, experiencing a rise of 0.4 points and reaching a value of 51.2.

This indicates that the manufacturing industry is finding it more costly to produce its goods. An important factor behind this is the disruption in global supply chains caused by travel restrictions imposed due to the COVID pandemic. With cheaper sources and suppliers beyond access, manufacturers are having to turn towards more expensive ones.

Majority of sectors pushing forward

The following table shows the performance of each sector in Australia’s manufacturing industry.

We can see that five out of the six sectors including: 

• food and beverages, 

• machinery and equipment, 

• petroleum, coal, chemicals, and rubber products, 

• building, wood, and furniture, and

• textiles, clothing, footwear, paper, and printing

have experienced expansion. 

The machinery and equipment sector has been helped greatly by the ‘instant asset write-off’ tax deduction (of up to $150,000) offered by the government for Australian-made products. Moreover, the building, wood, and furniture sector registered its first month of expansion since August 2019, owing to a large degree to the increase in demand due to government stimulus.

Future Outlook

The manufacturing industry of Australia has shown a great deal of strength and resilience in bouncing back and achieving a 3-year-high PMI in the past month. We must now sustain this growth by investing in Australian-owned and Australian-made products, building strong cultures, and innovating continuously.

We at Segen continue to play our part by helping our clients in finding high-caliber talent that fits into their culture and drives innovation and growth from within. You can learn more about our custom solutions and services here.